TY - JOUR
AU - Bonaparte,Yosef
AU - Cooper,Russell
AU - Zhu,Guozhong
TI - Consumption Smoothing and Portfolio Rebalancing: The Effects of Adjustment Costs
JF - National Bureau of Economic Research Working Paper Series
VL - No. 16957
PY - 2011
Y2 - April 2011
DO - 10.3386/w16957
UR - http://www.nber.org/papers/w16957
L1 - http://www.nber.org/papers/w16957.pdf
N1 - Author contact info:
Yosef Bonaparte
Claremont Graduate University
Claremont, CA 91711
E-Mail: bonaparte20@gmail.com
Russell Cooper
Department of Economics
The Pennsylvania State University
611 Kern
State College, PA 16802
E-Mail: russellcoop@gmail.com
Guozhong Zhu
Guanghua School of Management
Peking University
Beijing, China
E-Mail: gzhu@gsm.pku.edu.cn
AB - This paper studies the dynamics of portfolio rebalancing and consumption smoothing in the presence of non-convex portfolio adjustment costs. The goal is to understand a household's response to income and return shocks. The model includes the choice of two assets: one riskless without adjustment costs and a second risky asset with adjustment costs. With these multiple assets, a household can buffer some income fluctuations through the asset without adjustment costs and engage in costly portfolio rebalancing less frequently. We estimate both preference parameters and portfolio adjustment costs. The estimates are used for evaluating consumption smoothing and portfolio adjustment in the face of income and return shocks.
ER -